Company Reports

Although Repsol is ramping up its investment in lower carbon businesses to achieve its long-term emissions targets and succeed in the energy transition, its oil and gas businesses will continue to contribute the bulk of its earnings and cash flow during the next five years.

Repsol’s second-quarter adjusted earnings rose modestly to EUR 859 million from EUR 827 a year ago. Operating cash flow fell to EUR 925 million from EUR 1.7 billion the year before, and capital spending rose to EUR 1.8 billion from EUR 1.3 billion. With no changes to our moat rating or our fair value estimate, shares appear undervalued following recent weakness.

Repsol’s first-quarter adjusted earnings fell to EUR 1.3 billion from EUR 1.9 billion a year ago, largely on lower refining margins. Operating cash flow fell to EUR 1.4 billion from EUR 1.8 billion the year before, and capital spending fell to EUR 1.4 billion from EUR 1.8 billion.

Although Repsol is ramping up its investment in lower carbon businesses to achieve its long-term emissions targets and succeed in the energy transition, its oil and gas businesses will continue to contribute the bulk of its earnings and cash flow during the next five years.

With its fourth-quarter 2023 earnings, Repsol updated its strategic plans through 2027. The centerpiece of the update is a commitment to returns of upward of EUR 10 billion to shareholders. While shaking out at 25%-35% of operating cash flow through 2027, still lower than several European peers, it represents a substantial amount relative to Repsol’s market cap of EUR 17 billion. About EUR 5 billion will come from dividends, including a 30% increase in the per-share amount for 2024 and a 3% rise per year thereafter, with the remainder in share repurchases of EUR 2 billion-EUR 5 billion, depending on market conditions. We see the higher range as achievable based on current oil price expectations.

Although Repsol is ramping up its investment in lower carbon businesses to achieve its long-term emissions targets, its oil and gas businesses will continue to contribute the bulk of its earnings and cash flow during the next five years. It currently stands to benefit from its relatively higher exposure to natural gas and refining where market conditions are particularly strong.

Repsol’s third-quarter adjusted earnings fell to EUR 1.1 billion from EUR 1.5 billion a year ago, largely on lower oil and gas prices. Operating cash flow fell to EUR 1.3 billion from EUR 3.2 billion the year before, while capital spending grew to EUR 1.3 billion from EUR 962 million. Management reiterated its plan to make EUR 5 billion of organic investments in 2023 and to allocate 35% of organic investments in the year to low-carbon projects, a total of EUR 1.75 billion.

Repsol’s second-quarter adjusted earnings fell to EUR 827 million from adjusted earnings of EUR 2.2 billion a year ago largely on lower oil and gas prices and weaker refining margins. Operating cash flow fell to EUR 1.7 billion from EUR 1.8 billion the year before while capital spending grew to EUR 1.3 billion from EUR 859 million. Management expects full-year organic capital spending of EUR 5 billion. Repsol reiterated a 2023 30% payout ratio of cash flow to shareholders, on the upper end of the guidance range. This will amount to EUR 2.4 billion, including an additional 60 million shares to be repurchased by year-end for a total of 110 million in 2023.

Although Repsol is ramping up its investment in lower carbon businesses to achieve its long-term emissions targets, its oil and gas businesses will continue to contribute the bulk of its earnings and cash flow during the next five years. It currently stands to benefit from its relatively higher exposure to natural gas and refining where market conditions are particularly strong.

No-moat Repsol's first-quarter adjusted earnings rose to EUR 1.9 billion compared with adjusted earnings of EUR 1.1 billion a year ago largely on higher refining margins and improved utilization rates. Repsol announced it will return about 30% of cash flow in 2023, including a EUR 0.70 per share dividend in 2023 and the repurchase of 50 million shares before end of July. Additional repurchases later in 2023 are likely. The 2023 payout is at the upper end of Repsol's previous guidance range of 25%-30%. It is positive but below some peers, such as Total, which plans to pay out 40%. Given the relatively low debt load, investors might have been expecting more, potentially explaining the sell-off. The quarter's operating cash flow increased to EUR 1.8 billion from EUR 1.1 billion the year before; this covered capital spending and dividends despite increases in both. Net debt including leases decreased to EUR 880 million from EUR 5.9 billion the prior year, leaving Repsol with a gearing ratio of 3%, one of the lowest of its peer group. Upstream's adjusted earnings fell to EUR 474 million in the first quarter from EUR 731 million a year prior on lower gas realization prices and higher production costs. Production rose to 608,000 barrels of oil equivalent a day from 558 mboe/d last year due to new wells in the U.S., Libya, and Norway. The industrial (refining and chemical) segment's adjusted earnings grew to EUR 1,279 million compared with adjusted earnings of EUR 235 million the year before on strong refining margins and higher utilization rates. We expect continued strong performance from the segment even as distillate margins have weakened further in April, according to management. They remain high relative to historical levels, benefiting Repsol as its downstream is a relatively larger contributor to total earnings compared with peers. Management's comments on weakening margins could have contributed to the selloff. No change to our EUR 15 fair value estimate.

Repsol’s fourth-quarter adjusted earnings rose to EUR 2,007 million compared with adjusted earnings of EUR 872 million largely on higher refining margins and improved utilization rates. Full-year adjusted earnings for 2022 strengthened even further to EUR 6.7 billion compared with EUR 2.5 billion the year before.

Repsol’s third-quarter adjusted earnings increased to EUR 1.5 billion compared with adjusted earnings of EUR 623 million a year ago, largely on higher oil and gas prices and stronger refining margins. Operating cash flow more than doubled to EUR 3.2 billion from EUR 1.4 billion the year before while capital spending grew at a slightly lower rate to EUR 962 million from EUR 573 million last year. Management anticipates its 2022 spending to be on the upper end of its midyear EUR 3.8 billion-EUR 4 billion guidance and maintained its plans to distribute 25%-30% of organic operating cash flow. Repsol announced it is increasing its cash dividend to EUR 0.70 in 2023, an increase of 11% from the previous year. In addition, Repsol plans to repurchase an additional 50 million shares by year-end, thus accomplishing its 2021-25 redemption target of 200 million shares three years in advance. Our EUR 15 fair value estimate and no moat rating are unchanged.

Although Repsol is ramping up its investment in lower carbon businesses to achieve its long-term emissions targets, its oil and gas businesses will continue to contribute the bulk of its earnings and cash flow during the next five years. It currently stands to benefit from its relatively higher exposure to natural gas and refining where market conditions are particularly strong.

Repsol agreed to divest a 25% interest in its upstream business for $4.8 billion, consisting of $3.4 billion in equity and $1.4 billion in net debt, to EIG, an energy investor. Repsol will continue to consolidate the upstream results and act as operator. The sale implies an enterprise value of $19 billion for the upstream business or $8.3/barrel of oil equivalent proved and probable reserves, according to Repsol.

Repsol’s second-quarter adjusted earnings increased to EUR 2.1 billion from adjusted earnings of EUR 488 million a year ago largely on higher oil and gas prices and stronger refining margins. Operating cash flow doubled to EUR 1.8 billion from EUR 902 million the year before while capital spending grew to EUR 859 million from EUR 560 million. However, management revised upward capital spending guidance to EUR 3.8 billion-EUR 4.0 billion from EUR 3.8 billion previously, EUR 1 billion higher than 2021. Repsol maintained its plans to distribute 25%-30% of organic operating cash flow, which should lead to higher shareholder returns if conditions maintain or improve. It already increased the dividend this year and repurchased 75 million shares. It also announced an increase to its repurchase plan from 50 million to 75 million shares. Net debt including leases fell further to EUR 5.0 billion from EUR 5.9 billion at the end of the first quarter, implying a net debt/capital ratio of 16.6%, in line with peers. Our fair value estimate and moat rating are unchanged.

Although Repsol is ramping up its investment in lower carbon businesses to achieve its long-term emissions targets, its oil and gas businesses will continue to contribute the bulk of its earnings and cash flow during the next five years. It currently stands to benefit from its relatively higher exposure to natural gas and refining where market conditions are particularly strong.

Repsol’s first-quarter adjusted earnings increased to EUR 1.01 billion compared with adjusted earnings of EUR 471 million a year ago, largely on higher oil and gas prices and stronger refining margins. Operating cash flow improved only slightly to EUR 1.1 billion compared with EUR 1.0 billion the year before, but excluding working capital, it increased to EUR 3.1 billion from EUR 1.4 billion last year. Capital spending totaled EUR 576 million during the quarter as management reiterated its 2022 spending guidance of EUR 3.8 billion, with 30% focused on low-carbon investments. Our fair value estimate and moat rating are unchanged.

Following BP’s announcement to exit its Rosneft stake (see our Feb. 28 note), Equinor announced it would stop new investments and start the process of exiting Russia as well. Equinor has minimal exposure to Russia, producing only 27 mboed in fourth-quarter 2021, about 1% of its total. Year-end non-current assets of $1.2 billion in Russia were a little less than 2% of its total. Equinor holds interest in one offshore and several onshore oil and gas fields, increasing its presence in 2020 by acquiring a minority interest in 12 onshore conventional exploration licenses from Rosneft. Given the relatively small position, our fair value estimate is unchanged.

Integrated oils have been dealing with sanctions on Russia for some time as many of those imposed from the 2014 annexation of Crimea remain in place. While they have had little impact, the Russian invasion of Ukraine is likely to spur a new round of sanctions that are perhaps more punitive. As we wrote in our Feb 23. note, however, we think sanctions that disrupt the flow of oil and natural gas out of Russia are unlikely given the West’s aversion to the higher prices that would likely follow. Meanwhile, Russia is unlikely to withhold volumes given its reliance on oil and gas revenue. Furthermore, effective sanctions that bite, might materially impact Western firms, making them less likely to be implemented, as well. That said, the uncertainty adds a new level of risk for those firms operating in the country. Of the integrated oils, we find BP and TotalEnergies to be the most exposed.

Repsol’s fourth-quarter adjusted earnings rose to EUR 872 million compared with adjusted earnings of EUR 404 million a year ago, largely on higher oil and gas prices and stronger refining margins. Full-year adjusted earnings for 2021 strengthened even further to EUR 2.5 billion compared with EUR 600 million the year before.